India's FY23 fiscal deficit likely to hit 6.7% on free grains move

The Narendra Modi government’s decision to extend the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) until September will increase the food subsidy outlay for 2022-23 (FY23) to Rs 2.86 trillion, from the Budget Estimates (BE) of Rs 2.06 trillion. This, coupled with high global commodity prices and their impact on fertiliser subsidies, has put the Centre’s fiscal deficit target for the coming year under stress, even before it begins.
 

Provided all other assumptions in the 2022 Union Budget remain the same, the calculations show that the Rs 80,000-crore outlay to extend PMGKAY will take the FY23 fiscal deficit BE to Rs 17.4 trillion, from Rs 16.6 trillion, or 6.74 per cent of gross domestic product (GDP), from BE of 6.4 per cent.
 

The fact is that other assumptions may not remain the same.
 

The BE for fertiliser subsidy in FY23, which begins April 1, at Rs 1.05 trillion is also under threat due to elevated commodity prices. While policymakers are unwilling to put a new number to it yet, industry experts say that at current prices, the Centre may have to shell out an additional Rs 40,000 crore in fertiliser subsidies.
 

The numbers are looking insufficient, owing to the continuing surge in urea rates and the expectation that other key raw materials like phosphate and ammonia may further come under pressure due to rising crude oil and gas prices.

Trade sources said the Indian pooled gas rates may go up to $18 per metric million British thermal unit (mmBtu), from the current $16 per mmBtu. Rough estimates show for every $1 increase in pooled gas rates, the subsidy requirement for urea increases by Rs 4,000-5,000 crore.
 

Analysts welcome the move to extend PMGAY, saying the poor have been the worst hit by the pandemic, even though the Indian economy is recovering. They also said that global prices will seep into domestic food prices and hence, free food support for the poorest is essential.
 

They add that containing fertiliser subsidies will be a bigger challenge. There may come a time when the Centre may have to reduce excise duties on retail petrol and diesel further in order to provide relief to citizens.
 

“For the benefit this particular free food scheme has delivered, the outlay may have more benefits than just the cost itself. The real challenge from a fiscal standpoint is how do you mitigate the challenge of higher fertiliser and crude oil prices. That will be the primary challenge in the minds of policymakers in Delhi,” said Rahul Bajoria, India economist, Barclays.
 

Bajoria and CRISIL Chief Economist D K Joshi said that the Centre’s FY23 nominal GDP growth estimate of Rs 258 trillion and net tax revenue target of Rs 19.34 trillion were both conservative and that provided policymakers with the proverbial cushion. That cushion is now gone, thanks to the war in Europe and its impact on global prices and inflation at home.
 

“Had the Budget been made today, the numbers would have been very different. The point is it is not only food, you will also see the fertiliser subsidy burden rise. From a budgetary perspective, the Centre had kept some slack in the sense that revenues were conservatively estimated. This will eat into that slack,” said Joshi, adding that at the end of FY23, if the government wants to keep the fiscal deficit where it has budgeted it, it will have to eat into capital spending.
 

“This will lead to reshuffling of spending. So either your budget deficit will be dented, or your capital expenditure (capex) plans,” he added.
 

If the government wants to keep budget deficit in check, its only avenue, rather hope, will be that higher inflation, and thus, higher nominal GDP, will also lead to higher tax collections.
 

“We are assuming a situation which could be a repeat of what we saw in the current fiscal year, where net tax collections are expected to exceed Revised Estimates,” a senior government official told Business Standard.
 

Finance Minister Nirmala Sitharaman has pegged the Centre’s capex for FY23 at Rs 7.5 trillion, as public investment in infrastructure remains the plank on which the Modi government is betting India’s economic revival on after three waves of the Covid-19 pandemic. The figure includes Rs 1 trillion in long-term, interest-free loans to states for their capex needs.